Bank credit allocation in Latin America and the Caribbean

Submitted by Eva M. Gutiérrez
On Mon, 09/24/2018

co-authors: Nadeem Karmali, Diego Sourrouille

The recent economic growth performance of the countries in Latin America and the Caribbean (LAC) has been hampered by poor productivity growth. While many factors explain the poor productivity and growth performance in the region, lack of financial development, particularly long-term credit to fund productivity-enhancing investments, is often cited as a problem.

Banking systems are the main providers of long-term financing to the private sector around the world. Regardless of their size or the income level in their country of origin, to fund

fixed assets, firms obtain most of their financing from banks. Households’ main long-term investment, housing, is also overwhelmingly financed by banks.

Despite the importance of long-term finance, data on bank loan maturities are scarce, especially for LAC. Commercially available data sets do not have adequate coverage of loan maturities for the region. For example, in 2014, only 2 percent of total loans originated by Bankscope-reporting banks in LAC included information on maturity. The share increased to 18 percent by 2015, but LAC is still the region with the lowest data coverage on loan maturity. The Orbis data set on firm balance sheets contains information on the maturity of firms’ bank debt, but fewer than 30 firms reported annual bank debt maturity data in countries such as Chile, Peru, and Mexico during 2004–14 in the Orbis data set.

To address this shortcoming, we constructed a data set on the structure of bank credit allocation in LAC by maturity and purpose of credit (consumer, mortgage, or commercial) in a recent working paper[1]. To the extent that consumer lending is mostly short-term (less than 5 years maturity in most countries) and mortgages are long-term, looking at data by purpose of loan provides some useful information about loan maturity.

In partnership with the Association of Banking Supervisors of the Americas, we circulated a survey on individual bank loan portfolio composition and maturity. For the countries that did not respond to the survey, we used publicly available data from bank supervisory authorities or central banks. In total, we assembled data for 21 countries in the region across 2004–14 using data from supervisory sources. To compare the credit allocation structure in LAC with that in other regions, we compiled data from Bankscope. We then calculated the shares (over total loans) of loans obtained from these sources, by maturity and purpose, and then multiplied these shares by International Financial Statistics credit data to obtain credit volumes. In all, we constructed data on credit by maturity for 107 countries and on credit by purpose for 103 countries. To our knowledge, this is the most comprehensive cross-country data set on bank loans by maturity, and construction of the data set is the main contribution of the paper.

Using these data, we analyze patterns and trends in bank credit allocation across regions and explore how these patterns differ in LAC. Benchmarking the structure of credit in LAC, controlling for factors affecting the credit level, such as per capital gross domestic product (GDP), country size, and demographics, we find (as in other studies) that LAC is financially underdeveloped because credit-to-GDP is lower than in peers.

However, while lack of long-term credit for investment purposes has long been cited as a factor hampering growth in LAC, we find that LAC is financially underdeveloped because short-term credit-to-GDP is lower than in countries with similar income levels, while long-term credit is at par. Consumer and commercial lending is lower in LAC, but mortgage lending appears in line given income. Lower commercial and consumer credit underlines the problems of access to finance for small enterprises, which abound in LAC. Smaller, largely informal firms frequently use consumer loans to fund working capital needs.

We also use nonparametric regressions to explore how patterns of credit allocation evolve with income. We find that the relation between credit-to-GDP and per capita income is nonlinear, with credit-to-GDP growing much faster than per capita GDP in high-income countries. Long-term lending grows faster than short-term lending in upper-middle-income and high-income countries, but not in low-income countries. In the latter countries, income growth has a greater effect on the share of short-term credit-to-GDP. Hence, the composition of credit by maturity varies considerably with income. For low- and lower-middle-income countries, the share of short-term credit-to-GDP is similar to the share of long-term lending. When countries reach upper-middle-income status, the share of long-term credit is clearly larger.

Analyzing credit by purpose, commercial loans are more sensitive to income growth than consumer or mortgage loans. Mortgage lending only reaches 10 percent of GDP for high-income countries. In contrast, loans with maturity longer than 5 years reach a 10 percent share of GDP in middle-income countries, indicating that commercial and even consumer loans in these countries have maturities over 5 years. Hence, we find that consumer loans are the largest portfolio in low-income countries, but commercial lending quickly becomes the largest portfolio as income levels grow and countries reach middle-income status.

Additional econometric work was left for further work, as this first paper is a data paper. However, the results of simple correlation analyses are consistent with previous findings in the empirical literature. Long-term credit is associated with sound macroeconomic frameworks, higher income levels, higher savings mobilization, and good financial infrastructure and legal frameworks. On bank ownership, the negative association between credit levels and foreign banks found in the literature seems to be driven by medium- and short-term credit. The negative association between government bank ownership and credit levels seems to be driven by long-term credit. Focusing on LAC, the patterns of association are similar to those in countries in other developing regions except in the case of depth of credit information.

These results are suggestive. Additional work is necessary to identify patterns of association and causality effects between macroeconomic and financial variables and long-term credit around the world and in Latin America.